- Artificial intelligence is the hottest area of the stock market right now. A screen of five ETFs points to a list of highly favored companies
There are always fads in the stock market, but now we are in the midst of what could turn out to be a revolutionary trend that will last much longer than any fad — artificial intelligence.
In the Need to Know column on Feb. 9, Edward Stanley, who leads a team of strategists at Morgan Stanley, was quoted calling AI the real deal: “Generative AI, now popularized by ChatGPT, is showing all the usual hallmarks of hype,” he wrote. But then he added that “something suggests the AI hype is worth considering seriously,” calling it “the fastest platform to a million users and fastest to 100 million site views.”
Stanley called generative AI a “serious contender” for “tech diffusion with real market impact potential.”
An AI stock screen
When screening companies by business focus, it helps to have an industry label, such as “semiconductors.” Such isn’t the case for AI. One easy way to jump on the trend bandwagon would be to purchase shares of Microsoft Corp. MSFT, which provided $1 billion in funding for OpenAI when it began to develop ChatGPT, and is now ponying up billions more. Microsoft has been demonstrating how it will integrate ChatGPT with its Bing search engine.
For a new screen of AI-related stocks, we began by looking at the holdings of five exchange-traded funds with AI in their names:
- The Global X Robotics & Artificial Intelligence ETF holds 42 stocks. It tracks an index of companies listed in developed markets. The companies are expected to benefit from the increased utilization of robotics and artificial intelligence. The fund is weighted by market capitalization; its largest holding is Nvidia Corp. NVDA, which makes up 9.6% of its portfolio. It is the largest ETF listed here with $1.6 billion in assets under management. It was established September 2016.
- The iShares Robotics and Artificial Intelligence Multisector ETF holds 119 stocks that are equal-weighted, as it tracks a global index of companies that derive at east 50% of revenue from robotics or AI, or have significant exposure to related industries. This ETF has $269 million in assets; it was launched in June 2018.
- The $205 million First Trust Nasdaq Artificial Intelligence & Robotics ETF has 111 stocks in its portfolio, with a modified weighting based on how directly they are involved in AI or Robotics. It was established in February 2018.
- The Robo Global Artificial Intelligence ETF has $24 million in assets and was established in May 2020. This fund holds 69 stocks and isn’t concentrated. It uses a scoring system to weight its holdings by percentage of revenue derived from AI, with holdings also subject to minimum market capitalization and liquidity requirements.
- The newest and smallest ETF on this list is the WisdomTree Artificial Intelligence and Innovation Fund, which was established on Dec. 7 and has $1.8 million in assets and holds 76 stocks in an equal-weighted portfolio. According to FactSet, stocks are handpicked and selected companies “generate at least 50% of their revenue from AI and innovation activities, including those related to software, semiconductors, hardware technology, machine learning and innovative products.”
Taking all the stocks held by the ETFs together, we narrowed the list to 96 stocks held by at least two of the funds. We then narrowed further to 88 companies covered by at least five analysts polled by FactSet.
Among those 88 companies, 30 are rated a “buy” by at least 75% of analysts covering the stocks. Sometimes price targets can get ahead of analysts’ targets, especially in such a hot area of the stock market.
So we have narrowed the list further to the 20 stocks for which analysts see the most upside potential over the next 12 months, based on consensus price targets. Prices and targets are in local currencies, where the stocks are listed.
